Seventh Circuit Opinion on Role of Notice of Deficiency and Last Known Address Requirement (3/7/15)

In Gyorgy v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 3100 (7th Cir. Feb. 27, 2015), here, the Court addressed certain key aspects of tax procedure relating to the key role of the notice of deficiency.  For practitioners (other than novice practitioners), this is perhaps redundant to information they already know.  In some way, it is probably redundant for students also.  Still it is a pretty good summary of the process, so I offer it here.  In most cases, I will eliminate most case or other citations, except when I think they are important:  I include the Code sections because the Code is important.  The excerpts are:

We begin with an overview of the CDP process and the taxpayer's right to appeal. The Internal Revenue Code (the "Code") directs the Treasury Secretary—acting through the IRS—to determine, assess, and collect federal taxes. See I.R.C. §§ 6201(a), 6301. It also requires taxpayers to file returns as prescribed by the IRS. See id. § 6011(a). If the IRS finds that a person has unpaid taxes for a given year, it must notify him of the deficiency before it can collect the debt. See id. §§ 6212(a), 6213(a). Once the IRS mails notice, the taxpayer may petition the tax court to redetermine the correct amount of the deficiency. Id. §§ 6213(a), 6214(a). If he does not file a timely petition (normally within ninety days), then the deficiency "shall be assessed, and shall be paid upon notice and demand." Id. § 6213(c). 

If the taxpayer does not pay, then his tax liabilities become a lien on his real and personal property. Id. § 6321. To protect the government's rights against other secured creditors with respect to the encumbered property, the IRS must generally file a notice of the tax lien with the appropriate state authority. See id. § 6323(a), (f). It must then inform the taxpayer that it filed the lien notice. Id. § 6320(a). 

The taxpayer is entitled to challenge the lien in a CDP hearing before the Appeals Office, which is an independent bureau within the IRS. Id. § 6320(b). The "hearing" is informal and may consist of correspondence, telephone conversations, or in-person meetings. Treas. Reg. § 301.6330-1(d)(2), . In general, the taxpayer may raise any relevant issue. I.R.C. § 6330(c)(2)(A). That includes a challenge to his underlying tax liability if he did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. Id. § 6330(c)(2)(B). The appeals officer must consider the issues raised by the taxpayer and verify that the IRS followed proper procedures. § 6330(c)(3). 

After the hearing, the Appeals Office issues a notice of determination containing its findings and conclusions. Treas. Reg. § 301.6330-1(e), Q&A-E8. If the taxpayer is dissatisfied, he can appeal the determination to the tax court. I.R.C. § 6330(d)(1). If his underlying tax liability was properly at issue in the CDP hearing, the tax court reviews that issue de novo. It reviews the Appeals Office's other determinations for abuse of discretion. Jones v. Comm'r, 338 F.3d 463, 466 (5th Cir. 2003) ("In a collection due process case in which the underlying tax liability is properly at issue, the Tax Court ... reviews the underlying liability de novo and reviews the other administrative determinations for an abuse of discretion." (citing Craig v. Comm'r, 119 T.C. 252, 260 (2002))). 

The tax court's decision is in turn subject to review in the appropriate court of appeals. I.R.C. § 7482(a)(1). We review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Id. 

With this background in hand, we turn to the two issues on appeal. 

The Effect of Violation of the Statutory Requirements for a Notice of Deficiency (8/15/13)

Leslie Book has a good blog entry titled What Happens When The IRS Violates a Statutory Requirement Relating to Notices of Deficiency? (Procedurally Taxing 8/13/13), here.  His general topic is when courts will treat a failure to meet the statutory requirements for a notice of deficiency as invalidating the purported notice of deficiency.  The statutory requirements for the notice are:

1. The date to file a petition for redetermination in the U.S. Tax Court.
2. Notice of Taxpayer Advocate's Contact Information.
3. Notice sent to Taxpayer's Last Known Address.
4. Explanation of Basis for Deficiency.

I encourage readers to read Professor Book's blog entry for more detail than I offer here (except as to item 4).  The unifying theme is whether the taxpayer has been prejudiced by some IRS footfault in meeting these statutory requirements.  Professor Book discusses that prejudice issue in the context of requirements 1 and 2.  It is also present in #3, for the cases hold that, if, despite not being sent to the last known address, the taxpayer actually receives the notice of deficiency in time to file a petition for redetermination, the notice of deficiency will not be invalidated (so that it will operate to suspend the statute of limitations and support the ultimate assessment if the taxpayer did not petition the Tax Court or even if he did petition the Tax Court and loses the last known address issue).

I would like to address briefly the Scar case (Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987)) which Professor Book discusses briefly.  I offer the following from  my book (footnotes omitted):

As noted above, the deficiency notices must describe the basis for the deficiency but failure to do so will not invalidate the deficiency.  Thus, the taxpayer appears to have a statutory right to the information in the notice of deficiency, but no statutory remedy if he does not receive it in the notice of deficiency.  As we shall note, however, there may be some remedies short of invalidity of the notice for failure to meet this requirement of § 7522(a). 

Usually, there will be some explanation.  It may be summary or even cryptic because the determination usually follows an audit in which the taxpayer participated and was aware of the issues the IRS was raising.  Indeed, in such cases, usually the taxpayer will have been provided some type of report (often referred to as a Revenue Agent's Report (“RAR”)) that explains the proposed adjustments.  But again, although the Code provides that the taxpayer be notified of the basis for the deficiency, there is no Code remedy if one is not provided.

Contesting Liability in a CDP Hearing (11/23/12)

Judge Halpern has an interesting opinion in JAG Brokerage, Inc. v. Commissioner, T.C. Memo. 2012-315, here.  The case apparently involves John Gotti, reported to be an American mobster (Wikipedia, here),  who appears in the case along with Kim Gotti for the petitioner corporation.  Mr. Gotti was an officer of the petitioner and appears to have been incarcerated in solitary confinement when the notice of deficiency was issued to the corporate taxpayer, an artificial entity.  The notice of deficiency was copied to Mr. and Ms. Gotti (in her case under a different last name).  No Tax Court case was filed in response to the notice of deficiency.  The tax was assessed.  The IRS instituted collection procedures.  The corporate taxpayer sought to contest liability in a Collection Due Process process (CDP), in which the corporation was represented by Mr. and Ms. Gotti.  In a CDP hearing, the Appeals Office Employee (Appeals Officer or Settlement Officer) will not consider any issue previously disposed of in a CDP hearing or in a prior administrative or judicial proceeding in which the taxpayer could have contested liability and participated meaningfully.  As to the underlying liability, the taxpayer can only contest in the CDP hearing if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  § 6330(c)(2)(B).  So the question was a nuanced one over whether the IRS's proof of mailing the notice of deficiency was adequate to establish that this receipt requirement was met, so as to preclude the taxpayer from contesting the liability.

Judge Halpern rejects the IRS's motion for summary judgment based on its mailing the notice to the petitioner at its last known address and to the two Gottis.  Judge Halpern reasons: